Free market money is about market alternatives to government fiat fraud.

22 December 2006

Do Over from 1967

"Sherman, set the WABAC machine for 1967" Current mood: worried Category: News and Politics

Please don't panic. Do not make a rush for the exits. People rushing to get out are going to get swept up in events, someone is going to trip or get pushed, and there is a real danger of being trampled. Move calmly and in an orderly fashion to reduce your exposure to currency risk. You have time to make a complete exit safely and calmly. Please don't panic.

But be aware. Your wealth is in jeopardy if you have any dollar denominated assets or funds. To the extent that your assets are income producing stocks, you may be okay. Bonds or deposits are definitely not something you should hold if you expect to retain your wealth. You should consider very seriously moving your cash assets into silver or gold.

Yes, boys and girls, Mr. Peabody of "Peabody's Improbable History" and his pet boy Sherman have set the WABAC machine for 1967 when the idiots in the USA government had a similar law banning the melting of coins. To no one's surprise, it failed then, and it is going to fail now.

A little bit of context seems to be in order. Way back in 1963, president Kennedy tried to issue silver certificates to help Americans be sure that their money kept its value. That was anathema to the banking cartel and its Federal Reserveless System, so they stopped those silver certificates. Well, Kennedy was assassinated, and his successor, Johnson, was a greater friend of the banking cartel.

Johnson asserted that silver had become too valuable (!) to be used for money, because of monetary inflation of the dollar. So, the fedgoons took the silver out of the coins after 1964. Nobody was fooled, of course, and the Europeans and other foreigners who had the option to redeem dollars for gold began to do so as fast as they could. So began the London Gold Pool 1965-1971 to attempt to maintain the "official" price. Failed, as all such efforts do.

At one point in the height of that folly, roughly 1968, the military was airlifting gold to London to make good on the redemptions. There was so much gold piled on the weighing floor at Rothschild's in London that the floor actually broke through into the basement. London's gold market was closed for two weeks after that "accident." Many people in the biz think it would have been longer, but the gnomes of Zurich started up their gold market and began redeeming dollars for gold, so London was re-opened. "It was a miracle!"

So, anyway, gold which was officially $35 per ounce from 1934 to 1965 began to creep up on the world market, despite all efforts to keep it down. By the time of the evil Nixon's decision to viciously repudiate the Bretton Woods accord of 1944 (unilaterally, I might add, in violation of its terms) the price of gold on the world market was about $42 per ounce. You can see where that was a great deal for foreigners who were allowed to go to their central banks and redeem dollars for gold at $35 per ounce, sell that gold on the world market for $42 per ounce, put $7 in their pocket, and still have $35 to redeem for another ounce. "It's perpetual motion, Mr. Peabody!"

"No, Sherman, it isn't." So we set the WABAC Machine for 1971 and we see the evil overlord of the USA fedgoons, Richard Mischief Nixon, "closing the gold window." Prices began to shoot up, peaking in January 1980 at $895 intra-day on the April 1980 gold futures contract. Using the inaccurate consumer price index (CPI) as a vague measure of inflation, we have $2700 per ounce in today's dollars for that $895 high in 1980 dollars.

And that is where we are headed, folks. The 1967 law making it illegal to melt down silver coins for their metal or export them is now being visited on copper, nickel, and zinc coins.

Yes, can you dig it? Can you conceive of zinc being so valuable that it is worth melting down your pennies to get the 97.5% zinc content? Copper and nickel are so valuable that it is worth melting down your nickel coins. In each case, the metal in the coins is worth more than the face value of the coins. Thus, the government has once again passed a law, as if a law is going to change the nature of the money, or the desire of people to get value out of what they own.

The next step is typically currency controls, followed by hyperinflation, followed by dictatorship. I would expect the schedule to go a bit faster this time, what with all the digital aspects of fiat money. And, to be candid, we seem to be living in a police state already.

Please don't misunderstand my light-hearted review of this issue. The government is full of people who have not learned from history (as George Santayana, Thucydides, and Euripides have suggested one must) and are therefore determined to doom all of us to repeat it. The enormous inflation of 1965 to 1980 is coming back, and this time with a vengeance.

You thought the war in Southeast Asia was a boondoggle, a quagmire, and a great tragedy for tens of thousands of American soldiers who lost their lives and millions of Vietnamese who were slaughtered? The war in Southwest Asia is also a boondoggle, a quagmire, and a great tragedy for thousands of American soldiers who have died, tens of thousands who have been wounded, and hundreds of thousands of Iraqis and Afghans who have been killed or wounded. War is inflationary.

The official cost estimate for the war since 2001 is $549 billion. That's half a trillion dollars to blow things up, kill people, destroy infrastructure, and militarily occupy two nations. Try to picture that much money. My friend Rick Maybury of Chaostan.com suggests you consider a line of Lexus automobiles, brand new, plush leather interior, smell that new car smell, revel in the sound of the carefully tuned engine, the encompassing stereo, the delightful suspension. Now picture ten of those cars parked bumper to bumper. Now a thousand of them, a line three miles long of brand new luxury sedans. Now 6,295 of them. Yes, a line 18 miles and more long. Drive all 6,295 of those Lexus cars off a cliff every day for five years. That is the cost of the war, if you believe the official number, which is almost certainly a lie, and too low.

Inflation is coming back, and it is bringing friends. Inflation is the enemy of the ordinary person, the guy on a budget, the woman trying to feed her kids and make ends meet, the elderly, and the retired. It is your enemy. And, this time, inflation is coming back from all over the world.

It gets worse. You see, in 1980, Paul Volcker ended inflation with extremely high interest rates, and then began setting up to export dollars all over the world. Greenspan continued that activity. The dollar became the currency of choice in high inflation countries like Argentina, the Soviet Union, China, and elsewhere. There are now more one hundred dollar bills in circulation in Moscow than in the entire USA, by some reports.

More dollars were created on computer screens. Again, they were sent all over the world and people in other countries sent back all kinds of goods and services. Cheap! Set the WABAC machine for 2002 and go to China-Mart or The Home Despot and get a bench grinder for $29.

So, now China's central bank has a trillion dollars of USA government debt. A trillion dollars worth. European central banks have trillions more. And places like Malaysia and Iran have been proposing to do trade in EU euros or gold dinars instead of dollars.

There's going to be a rush for the exits folks, and it is going to make the Weimar Republic inflation of the 1919-1923 period look like a walk in the park. In 1923, the finance minister of Austria asked Ludwig von Mises how to solve their inflation problem, then running at 50,000% per year. Yes, fifty thousand percent inflation. Actually, as measured.

Now, Ludwig von Mises was a brilliant young economist, the leader of the Austrian school of free-market, laissez faire economics. He was widely regarded throughout Europe as a genius. And the finance minister, Joseph Schumpeter, was no slouch, either. So, von Mises said, "I agree to help you solve your problem. To do this thing, you must meet me at this streetcorner tonight at midnight." And gave an address.

Non-plussed but determined to solve his country's inflation problem, Schumpeter agreed. That night, von Mises was waiting on the corner in his trench coat. It was a brisk and moonless night. Two limousines arrived escorted by a dozen motorcycle cops. Out of one limousine comes the finance minister and out of the other the prime minister. They walk up to von Mises and ask him how to solve inflation. Everywhere around them this industrial thumping can be heard. Thump. Thump. Thump. Steady, constant, thumping.

And von Mises says, "Herr Minister, Herr Prime Minister, stop that noise." Then he explained that the noise was the sound of printing presses. Those printing presses were printing the Austrian schilling, and printing, and printing. It was not the pricing policies of shopkeepers causing inflation. It was the government printing money.

I mention this story, today, because the solution proposed by Ludwig von Mises is no longer available. You see, all the money has already been printed and shipped out around the world. More money has been created digitally by bureau-rats tapping at keyboards. Much of that money has also been sent around the world to buy goods and services.

So, when there is a rush for the exits, all that money is going to come back. It is going to come back at the speed of light. As fast as men and women in other countries can choose to do so, their bankers are going to wire funds to their American stock brokers and they are going to bid up the price of the stock market. Already, the stock market is lower in real terms, in terms of, say, gold, than it was in 2000. The stock market is way down in terms of its gold price. The recent "boom" above 12,000 on the Dow represents the early phase of that money coming back to be invested here, because it is clearly not going to hold its value as cash overseas.

There is no point to stopping the printing presses, now, because most of the money supply isn't even printed. And there is no control over this situation within the USA. The Federal Reserve has outsourced the money supply, so the choice of when to abandon the dollar as the world's reserve currency is entirely in the hands of foreigners.

Now, me, I've been around the world. I've met a lot of foreigners. I like 'em. Most of them are really nice people. Most people in the world are basically decent. They want the same things. They want their children to prosper and enjoy life. They want to know what's going on. They want to have a good time. They want to be left alone.

And, all over the world, in all the places I've been, people are perplexed about the USA government. The government of the USA sends soldiers into over 115 countries worldwide, occupies two countries in Southwest Asia right now, and behaves indecently and immorally in all sorts of ways in a great many places. People overseas don't much care for it. And they are going to have no compunction, no mercy, no shred of concern in sending their dollars back to America to be invested in stocks, or gold, or silver, or stuff. Bidding up the prices of stuff here and making Americans very poor is going to seem, to them, like a perfectly reasonable punishment for all the damage done in their countries by USA foreign policy. That's what I mean by inflation bringing friends.

Not friends of yours. But friends of inflation. All those dollars are waiting around to be put to use. They are out there. You don't have them. I don't have them. The USA government doesn't have them. The people who do have those dollars don't love your government. They don't understand your government. And they have no reason to hang onto dollars, because your government has been so shamefully violent in their countries.

Inflation is coming, and it is coming with a vengeance. You still have time. Prepare.